Fighting the Affiliate Tax in Mississippi

On January 18, 2010, Senator Tommy A. Gollott of Mississippi Senate District 50 introduced SB2927 (pdf link or here for current status) which attempts to redefine the “nexus requirement” for online or “remote” sales to include affiliate web sites such as mine (like Shopping-Bargains.com). I quote from this bill:

A person is presumed to be soliciting or transacting business by an independent contractor, agent, or other representative if the person enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet Web site or otherwise, to the person. This presumption may be rebutted by proof that the resident with whom the person has an agreement did not engaged in any solicitation in the state on behalf of the person that would satisfy the nexus requirement of the United States Constitution;

Obviously this bill is of great concern to me since I make my living through “link[s] on an Internet Web site” that are compensated via “a commission or other consideration” for referring customers. (The attempt to label affiliate relationships as constituting a nexus requirement has been called the Amazon Tax or the Affiliate Tax by many.) I have two major problems with the way this bill is written including the following:

1. The “nexus requirement” of affiliates is wrong since this issue was clarified in 1992 by the U.S. Supreme Court in their Quill Corp. v. North Dakota to mean a substantial physical presence.

Nexus is defined as “a means of connection”. The Quill decision addressed a dispute between the State of North Dakota and office supply retailer, Quill Corporation, over a computer software program and the collection of sales taxes. North Dakota argued that the computer program created a nexus or physical presence but the U.S. Supreme Court determined that it did not constitute the required physical nexus and so the state could not require Quill to collect sales taxes (Quill had no retail establishments or sales force in North Dakota.)

With the Quill decision in mind, how does an affiliate relationship via Internet links constitute a physical presence that could pass this Supreme Court test? An affiliate agreement is virtual which means it is even less of a physical presence than one could argue floppy disks were in 1992. Does my electronic relationship with out of state online retailers meet the nexus requirement? In my opinion it does not even come close.

In many ways an affiliate relationship with a merchant could be compared to a sign company renting billboard space along the highway. The merchant does not own the signs just as the merchant does not own my or any affiliate’s website. The merchant pays the sign company to display their message just as the merchant pays me to promote theirs. How does such an arrangement constitute nexus?

2. New York and North Carolina passed similar tax schemes and hurt small businesses (and ultimately their tax base).

The attempt by two states to apply sales taxes to Internet or “remote” sales were somewhat successful; however, the consequences were disastrous for many small businesses. When New York and North Carolina passed such taxes, the result was the massive removal of affiliates from those states by Amazon and other online retailers. In short, many online retailers simply removed their New York and North Carolina affiliates and thus, overnight, eliminated this supposed “nexus requirement”. The dismal results in these two states were these: (1) still no collection of sales taxes in those states because these online retailers had no affiliates in those states, and (2) substantial loss of income for many Internet businesses that relied on Amazon and other affiliate income to stay in business. Needless to say, the bottom line for these states were lost jobs as many entrepreneurs saw their incomes decimated. Of course lower business incomes means more layoffs, fewer new employees are hired, and a reduction in income and payroll tax collections.

There are tens of thousands of affiliates in other states and even other countries that are more than willing to pick up the slack for those who saw their relationships suddenly severed. Simply put, the law does not guarantee that sales taxes will be collected but it does mean that state’s affiliates will probably be dropped. Do we want this for Mississippi? Certainly not. (Amazon has also sued New York over this tax feeling it violates federal law and U.S. Supreme Court decisions. Overstock.com also sued New York challenging the constitutionality of this law.)

Now What?

I don’t want to just point out problems and not offer solutions. I know the states are losing sales tax revenues due to Internet sales. I think, however, attempting to link online affiliate relationships as equal to a “substantial physical presence” is the wrong way to address this problem. It is shortsighted and likely to backfire due to many unintended consequences.

For Mississippi, I believe we can pursue a far superior solution than this proposed tax. I am confident that my solution would withstand any legal challenge and would produce more jobs for my state. Furthermore, I feel it would allow the collection of more sales tax revenue while encouraging small business innovation and expansion. Let me explain.

My Proposed Solution to the Affiliate Tax in Mississippi

I propose that Mississippi reject this bill and instead put resources into attracting online retailers like Amazon, Overstock.com, and others to actually locate something physically in our state. It could be a call center, a data center, a warehouse, an R&D facility, or something else but we should encourage online retailers to own something physical within Mississippi. We have many competitive advantages including lots of land, labor, and a low cost of living. We have a good infrastructure and ready access to air and water ports and the interstate highway system. Our labor costs are reasonable and our workforce is willing.

If economic incentives don’t attract online retailers to own something here then I think our economic development authorities, colleges, and universities should consider donating office space within Mississippi to establish R&D, student recruitment, and other training centers for ecommerce retailers. Let’s offer them something so good they have to come — something that provides a great PR opportunity for Mississippi and online retailers might be a real win-win.

I repeat, Mississippi should consider making a great offer that remote sellers can’t refuse in exchange for them locating some kind of facility within our state. The result would be an actual physical presence that would meet all the nexus requirements of Quill. And to make matters even better, this move would not harm my business and others like me but would instead produce more jobs and tax revenues for our state. It would provide a stepping stone for us as a state to pursue an expanded slice of the ecommerce pie. It would be good for business and people in Mississippi.

What can you do to fight the affiliate tax in Mississippi?

Please join me in contacting Senator Tommy A. Gollott about this important issue. Also, if you are a Mississippi resident, please contact your local representative and senator and let them know how this tax will negatively impact you, your business, and our state.